Personal liability umbrella policies can protect you from a disastrous lawsuit. Insurance agents love to sell these policies by citing our litigious society.
But do you really need one? Like many issues in financial planning, it depends.
Personal liability umbrella policies provide additional personal liability coverage on top of the coverage provided by your homeowners and auto policies. Liability insurance protects you against claims when you hurt someone physically (bodily injury), libel or slander someone, or damage someone’s property.
If you have $300,000 in homeowners coverage, a $1 million umbrella policy will mean you have $1.3 million in total liability coverage. Insurers require underlying policies to have a minimum liability coverage level, such as $300,000, before applying the umbrella policy.
Do You Need a Personal Liability Umbrella Policy?
I’ve spoken to insurance agents and asked them how often umbrella policies they have sold have actually had a claim made upon them. The percentage is extremely low. In the cases in which there was a claim, the issue was whether there was some egregious fault by the insured, such as drunk driving or the harming of kids.
Claims on auto policies are more likely than those on homeowners policies. Accidents in the home in which a guest sues you are quite rare. Unless you have a specific issue like a swimming pool or your home is where all the neighbor kids hang out then your home is unlikely to be the cause of claims against you.
Auto accidents can be more troublesome. If you are an aggressive driver (or have teenage drivers that like to go fast) or believe you can handle two cocktails and still drive home safely then you may need an umbrella policy. Be honest with yourself about thinking if you have engaged in high-risk behavior that could make an umbrella policy necessary.
How Much Coverage?
It is extremely difficult for an injured party to collect more than you have. A reasonable first step is to obtain coverage that matches your net worth.
Net worth equals your assets (such as your home, cars, brokerage account, retirement account, etc.) less any liabilities (such as mortgage debt, auto loans, etc). If your net worth is $1.5 million, a $ 1 million umbrella policy may be appropriate given that your underlying auto and homeowners policies likely have $300,000 in liability coverage. A larger personal liability umbrella may be required if your net worth is higher.
Personal liability insurance is relatively inexpensive. Possibly only $200/year for a $1 million policy. And you can save premium money if you use your same auto and homeowners insurer.
In sum, check to see if you could be the target of a liability lawsuit. If so, consider a personal liability umbrella policy in the amount that matches your net worth.